MF Warning Fails to Capture Full Economic Picture

The spring meetings of the IMF and World Bank are typically defined by careful language and cautious forecasts. Inside the IMF’s Washington headquarters, the mood is more unsettled than usual. Until recently, the IMF’s chief economist, Pierre-Olivier Gourinchas, had been preparing to edge up his global growth forecast for 2026 from 3.3% to 3.4%. Then the Middle East conflict escalated, the Strait of Hormuz closed and oil markets went haywire.

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The new outlook models three scenarios based on the conflict’s length and energy-price impact. In a short-lived conflict, the baseline is 3.1%. Gourinchas’ worst case of 2% is a level seen only a handful of times since the 1980s, including during the 2008 financial crisis and Covid pandemic.

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There’s another concern, one with echoes of the 1970s oil shock. If inflation expectations become embedded, they can be difficult to shift. And after the post-pandemic price surge, businesses and workers may move faster to protect themselves, raising prices or pushing for higher wages.

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Elsewhere at the meetings, Reza Baqir – Pakistan’s former central banker, now at professional services firm Alvarez & Marsal – offered a more pointed view. Headline IMF forecasts, he argued, can smooth over the reality on the ground.

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“When you average together the gainers and the losers, you don’t get the real story about the impact, the real magnitude of the pain that is out there right now,” he said.

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For countries such as Egypt, Pakistan, the Philippines and Bangladesh, the strain is immediate: rising food and fuel costs, and increasingly difficult fiscal choices. Some policymakers, he said, are drawing comparisons with the early pandemic shock.

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His message to the IMF: focus less on broad scenarios and more on where the pain is most acute. Then deploy the firepower.

Source: IMF